When it comes to trading, Goldman Sachs rarely finishes last.
So when the New York-based investment bank turns in a worst-in-class performance, people freak out.
And Goldman's first-quarter results this week offered a trifecta of such results. The bank, whose success in recent decades has inspired the envy of rivals and produced three U.S. Treasury secretaries, turned in the worst performance among peers in all three of Wall Street's biggest cash cows: bond trading, stock trading and investment banking.
Combined revenue from those businesses grew just 3% at Goldman, compared with an average 24% gain for JPMorgan Chase , Bank of America , Citigroup and Morgan Stanley , according to an analysis by RBC Capital Markets.
While one quarter does not make a firm, as Goldman CFO Martin Chavez was quick to point out on a conference call Tuesday with analysts, the stock tumbled anyway. Goldman's shares are down 3.7% this week, even as rival Wall Street firms gained after reporting standout quarters for trading and securities underwriting that allowed them to handily beat earnings estimates.
According to Mike Mayo, an independent analyst who has covered Wall Street for about 25 years, the stock's reaction serves to demonstrate how little investors actually understand about how the firm makes money from its giant, opaque trading businesses.
It's fine when things are going well; when they're not, investors get worried. And it's partly a dilemma of Goldman's own making. The firm divulges few details on its trades, in good times or bad.
"If you're going to have that lack of transparency, it raises additional questions in a quarter when Goldman underperforms," Mayo said in an interview.
As an example of how hard it is to get a peek into the complex workings of Goldman's trading business, just take the bank's mammoth fixed-income division, which transacts in government and corporate bonds along with oil, gas, gold, electricity, coal, currencies, mortgages, loans, trade claims, exchange-traded funds and derivatives.
On its own, the division produced $7.57 billion of revenue last year -- roughly the same as all of Charles Schwab -- but details on how it does what it does in any given quarter are scant.
In an earnings press release this week, Goldman said that net revenue in the fixed-income division was "essentially unchanged" from a year earlier.
There were "significantly higher net revenues in mortgages and higher net revenues in interest-rate products, offset by significantly lower net revenues in commodities and currencies and lower net revenues in credit products." No percentages, no specifics.
And certainly nothing about individual trades in a single division that wiped out winning bets by the rest of the department.
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Analysts achieved little success in their attempts to learn more during a conference call with Chavez, the CFO. Witness the following exchange, where UBS analyst Brennan Hawken admitted to being nonplussed over the trading shortfall, especially given the strong performance by rivals.
"I get it that commodities is a laggard, but is there anything further?" Hawken asked. "Just, I'm still confused. I think I have some company."
"Sure, as I said, we underperformed this quarter, and the underperformance was driven by commodities and currencies," Chavez responded. "Business mix differences might reflect relative performance quarter-to-quarter."
As if that weren't enough of a brush-off, Harvey Schwartz, Goldman's co-chief operating officer, chimed in: "I think Marty has covered it in pretty good detail, Brennan."
Dave Hendler, managing principal of analysis firm Viola Risk Advisors, says that analysts and the media obsess too much over trading revenue, notoriously difficult to budget while being "very cyclical and subject to geopolitical woes."
Indeed, the current quarter could see higher volatility in markets if French elections usher in a far-right or far-left president whose plans might put stiff downward pressure on the euro.
Hendler, though, sees Goldman shares bouncing back due to the long-term strength of the firm's merger-advisory business. (In this week's report, Goldman highlighted its rank as first in the world in advising on mergers and acquisitions announced year-to-date.)
"We caution against getting caught up in the quarter-to-quarter volatility inherent in trading businesses," Barclays analyst Jason Goldberg wrote in a report Wednesday.
For now, investors can be forgiven for feeling like they're in the dark.
"The question in the market is, 'Is this just part of the normal fluctuations that Goldman has, or something that's not working with the strategy?'" Mayo said.
Editors' pick: Originally published April 20.